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As I’ve written in past memos, I have an indelible recollection of the first book I read as a Wharton freshman in 1963. The book was Decisions Under Uncertainty: Drilling Decisions by Oil and Gas Operators by C. Jackson Grayson, Jr. (who in 1971 would take on the role of “price czar” in the Nixon administration’s efforts to get inflation under control).
The best and most lasting thing I took away from Grayson’s book – and the first thing I remember learning in college – was the observation that you can’t tell the quality of a decision from the outcome. This revelation had a profound influence on me as a 17-year-old and represented the first critical building block in my understanding of how the world works.
As Grayson explained, you make the best decision you can based on what you know, but the success of your decision will be heavily influenced by (a) relevant information you may lack and (b) luck or randomness. Because of these two factors, well-thought-out decisions may fail, and poor decisions may succeed. While it might seem counterintuitive, the best decision-maker isn’t necessarily the person with the most successes, but rather the one with the best process and judgment. The two can be far from the same, and especially over a small number of trials, it can be impossible to know who’s who.
By my stage in life – if not well before – one should have figured out his strengths and weaknesses and tilted his activities toward the former. I’ve concluded that my strengths include the ability to:
Also very important has been the ability to internalize Grayson’s point about decision quality (and thus live with my unsuccessful decisions from time to time). This set of attributes equipped me for a career in investing . . . and for finding enjoyment in games of chance.
Although I’ve made reference to them in some past memos, games have played a bigger part in my life than you probably know. Because of the many connections between investing and gambling, many of the investors I respect play blackjack, poker or backgammon. You might enjoy learning about my past in this regard.
Like most people my age, I spent time as a child playing card games like “War” and “Old Maid” (there were no videos to watch or video games to play, and my parents considered television a pernicious influence that had to be strictly rationed). My first brush with “grown-up” games and betting involved gin rummy starting around age 12. Hours spent playing with my three closest buddies established a pattern for life.
When I was a sophomore in college (1964-65), card games at the fraternity house took up an embarrassingly large fraction of my time. A different game occupied our afternoons each semester, including gin, pinochle, cribbage, hearts, casino, bid whist, spades and tonk (many of these have since been relegated to the dustbin of leisure-time history). Most evenings were devoted to poker. (You’re right to wonder when I studied. I actually can’t remember doing much of it that year.) And when I eventually got serious about my studies as an upper-classman, I took up the commensurately serious game of bridge.
The next big step came in 1970-72, when I began to ski and was introduced to backgammon back at the lodge. Although probably dismissed by non-game players as trivial, backgammon, like bridge, is a game that requires a great deal of thought and one where study and practice can lead to a very high level of skill. More on it later.
As you may know, I got Citibank to move me to Los Angeles in 1980. One of the big ways this changed my life was that it led me to meet my great friend Bruce Newberg, whose mind is perfect for handling the odds and strategies involved in games (as it is for investing). Bruce and I have had thousands of hours of enjoyment playing backgammon and gin over the last 40 years. We’re probably about even financially after all that time, and if not, the winner’s hourly rate of pay is in pennies. All we get out of it is fun. Our motto is, “The only thing worse than losing is not playing.”
I also enjoy visiting a casino once in a while, and the opportunity to play blackjack. In blackjack, you and the dealer are each dealt two cards. You can “hit” or “stay” as you choose – take additional cards from the deck or decline to do so. The dealer has no choice; he’s required to hit (or forced to stay) depending on his card total. In the end, whoever’s total is closer to 21 without going over is the winner.
Lots of people go to casinos every year and lose money at blackjack without knowing the first thing about how to play successfully. Instead, they count on luck and hunches and say they “just play to have fun.” But there are actions you can learn to take in blackjack – mostly regarding when to hit or stay – that will improve your results. These have been codified into what’s called “basic strategy.”